The problem with America’s new credit card technology

The U.S. will hit a much-hyped deadline on Thursday for credit card issuers and merchants to transition to technology that has been commonplace across much of the rest of the world for about a decade.

The migration, from credit cards that store data on the magnetic stripe to ones that feature a small, square chip that is inserted into a card reader rather than swiped, has been hailed as one that will reduce fraud and credit card counterfeiting. Liability for fraudulent transactions will shift to whichever party, between the merchant and card issuer, has the lesser technology. But for consumers using credit cards, not much will change.

That’s because the U.S. is only going halfway on the new technology, also called EMV, which stands for Europay, MasterCard and Visa, the companies that developed it in 1994. While other countries combine the smart chip-equipped cards with a personal identification number, akin to the way we access bank accounts using debit cards and PINs, U.S. banks are issuing chip cards without the code functionality.

The card issuers say they don’t want to burden Americans with another four-digit code, and will instead continue asking people to scrawl signatures on receipts to verify transactions. Signatures, though, are almost useless: People pay little attention while scribbling on receipts, and signatures aren’t used to prove that the signer is the same person whose name appears on plastic. Instead, banks typically only pull up copies of receipts when a customer doesn’t recognize a purchase on a statement.

By several counts -- including MasterCard’s own -- about six in 10 Americans still don’t have chip-enabled credit cards, despite the Thursday deadline. And the personal finance website NerdWallet found in a survey that 40% of Americans are “not at all sure” which types of fraud EMV is designed to prevent. (The answer: Counterfeiting the cards by duplicating the magnetic stripe).

Instead of shifting from World War II-era credit card technology to the chip-and-pin functionality that is commonplace in nearly every other developed country, the U.S. has created its own middle ground with chip-and-signature.

Doug Johnson, senior vice president of payments and cybersecurity policy at the American Bankers Association, says when the industry began considering investing in EMV, it realized it could achieve the benefits of making cards counterfeit-proof without also investing in the process of doling out PIN numbers and creating that infrastructure for credit cards. “Let’s move forward and make expenditures for security infrastructure that address the fraud that’s coming,” he says, referring to online sales fraud.

“That kind of middle step has caused a lot of confusion around these types of cards and added a layer of complexity that wouldn’t necessarily have been there if they had just gone straight to chip-and-pin,” says Matt Schulz, senior industry analyst at CreditCards.com. “There’s definitely a large number of people who still don’t have these cards, and it’s an even larger number of people who don’t understand what’s going on with the cards and why they’re important.”

For example, in other countries with chip-and-pin technology, servers at restaurants bring payment terminals to diners’ tables, where customers enter their PIN numbers after the card is inserted into the reader. That also protects the cardholder from nefarious waiters (or other staff) who may opt to write down their credit card numbers to make fraudulent online purchases later.

At U.S. restaurants, that won’t happen. “We know that nothing is going to change in terms of the process,” Laura Chadwick, director of commerce and entrepreneurship at the National Restaurant Association, says. “Because we are not implementing a chip and pin system, we will not be forced to have full-service restaurants bring the terminals to the table like they do in Canada and Europe.”

What you should know is that the most important thing for consumers won’t change: You’re still not liable for fraudulent transactions.

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